Texans are always shopping for more cost effective home insurance and they generally have a list of questions for us when shopping. One of the more frequent questions revolves around the use of credit scoring in pricing insurance. They've heard that some companies use it and don't understand why it can have a dramatic impact on prices. I will be blunt. I am not completely in agreement with the hows and whys of using credit scoring for insurance pricing. But for the purposes of this blog, we will stick to how to best use information to your benefit as a Texas homeowner.
So let's start from the premise that most every standard home insurance company in Texas does in fact use credit scoring in their pricing. Some of them are more heavy handed with that factor than others, but it is definitely in play for the vast majority. Bank Rate does a great job of explaining how a higher credit score affects your total cost of a mortgage. Given this, it shouldn't be a major surprise to anyone that a similar phenomenon where a lower score equals a higher cost. Ultimately, the insurance company needs your premium payment, along with all the others, to be able to pay all claims as they come in. If you are less likely to pay your bill, most companies will tend to charge more to collect more up front and over time. Simple. But is there more to it?
The answer is yes. Insurance companies employ people called actuaries to set the rates that you and I pay for coverage. They are constantly looking for trends in data to adjust rates up and down for certain characteristics. One of the trends that have documented on multiple occasions is that lower credit scores are more likely to have a claim. More claims means more money needed to cover the population. The actuaries give a two fold reason.
This population just has more claims because they are more careless with their home. Just as they are with their payments.
This population is more likely to commit fraud in order to obtain cash to cover debts or play the money shuffle.
These two reasons tend to be a little more controversial, but in the end the result is the same. The prices go up, and substantially with some companies that use a credit score more heavily.
So what are your options?
The first, and most obvious, is to simply pay bills on time as that is the biggest hurdle to overcome. The next option is to see if a paid in full discount can help bring the price down. The third is to research insurance companies that are not as punitive towards credit scores. As an independent insurance agent, we can help you navigate this process to make sure that the companies that you are choosing are the best for your circumstances.